Amid all the talk now about interest rate rises now coming to a stop, it's easy to forget inflation is actually still uncomfortably high.
Although the March quarter saw the annual inflation rate in Australia drop to 7% from 7.8% in the previous quarter, 7% in itself is way too high.
The worry now is, according to IML senior portfolio manager Hugh Giddy, that the Reserve Bank of Australia will just sit back.
"Despite inflation falling modestly to 7% in the latest figures, economists think the Reserve Bank will not raise rates much further even though the cash rate at 3.85% is well below headline and other measures of inflation," Giddy said on the IML blog.
"Either because they have done enough or are simply too dovish to really care about inflation."
So if it's going to take a while for the inflation beast to be tamed, you need to pick S&P/ASX 200 Index (ASX: XJO) shares to buy accordingly.
Remember, any money not invested is shrinking by 7% each year.
The most 'appealing buys' in the ASX 200 right now
Despite the ASX 200 rocketing 3.9% since 20 March, Giddy reckons there are still "appealing" buys out there if you know where to look.
"Features to look for in companies are: pricing power or the ability to recover cost increases without significantly impacting sales volumes, providing an essential good or service, and a strong balance sheet," he said.
"A portfolio of quality businesses such as these could be a key pillar in defending your wealth against the ravages of inflation."
Helpfully, Giddy named three examples that are excellent buys in this environment.
"Aurizon Holdings Ltd (ASX: AZJ) has inflation indexation on its rail haulage contracts with miners and other customers," he said.
"Volumes have suffered with La Nina's widespread flooding, but are likely to normalise as El Nino reasserts itself."
Earnings on the rail tracks are also inflation-proof, as the asset base and regulated return rise in line with the consumer price index.
"Finally, the company's recent purchase of the Adelaide to Darwin rail line (OneRail) is likely to favourably surprise the market if it is successful in signing up new mining customers in the centre of Australia," Giddy said.
"The longer term vision of moving containerised imports around the country more cost effectively could really change profits and perceptions of the business."
Aurizon shares have lost 4.35% year to date, while paying out a handy dividend yield of 5.1%.
'The company has delivered strong earnings and a higher dividend'
His second pick, Telstra Group Ltd (ASX: TLS), is now cashing in on its "extraordinarily strong market position and historical investment in its network".
"After years of losing fixed line customers to the NBN and facing a price war in mobile services, the company has delivered strong earnings and a higher dividend."
The nation's biggest telco can raise prices on its mobile phone plans in sync with inflation, with "customers who are becoming conditioned to price increases generally".
"The annuity cash flow from the NBN, which is renting Telstra's ducts and exchanges, is indexed to inflation."
Telstra shares are handing out a 3.9% yield at the moment, with the shares trading 9.6% higher than they did at the start of 2023.
Lotteries operator Lottery Corporation Ltd (ASX: TLC) is Giddy's final example of a business with outstanding pricing power and resilient demand.
"Prices have been increased on various games with players largely accepting the increases," he said.
"The Lottery Corporation enjoys long-dated licences and a monopoly position."
Giddy noted the company has implemented rule changes on games such as Powerball in order to increase jackpot regularity, which drums up interest in the lottery.
"Increased digital uptake by customers increases the margin for the company, which, combined with rising revenues, has created a favourable profit trajectory," he said.
"Although lottery tickets are a discretionary purchase, history has demonstrated that lottery revenues are remarkably resilient in economic downturns."
Lottery Corp shares have gained 7.9% so far this year.
